IMF: Oil price shocks test the limited fiscal space of the global economy.

At a time of continued turmoil in the Middle East, the International Monetary Fund has issued a new warning that the conflict in the region has constituted a "major supply shock" to the global economy, posing a severe test to global economic resilience against the backdrop of limited fiscal policy space. IMF Managing Director Kristalina Georgieva stated that despite the two-week ceasefire agreement reached between the United States and Iran, the overall situation remains full of uncertainty. The IMF will provide a variety of scenario analyses in the upcoming "World Economic Outlook" to be released next week, but even in the most optimistic scenario, global economic growth expectations will be lowered. "It is certain that economic growth will slow down, even if peace can be maintained," Georgieva pointed out in her speech before the spring meetings in Washington. She revealed that prior to the outbreak of conflict on February 28, the IMF had planned to raise its global growth forecast. However, with damaged infrastructure and disrupted supply chains, the economic outlook has deteriorated significantly, making a downward revision unavoidable even against the backdrop of a ceasefire. Soaring oil prices alongside inflationary pressures The IMF pointed out that the supply shock had led to a sharp rise in oil prices, exacerbating global food security issues. The Organisation for Economic Co-operation and Development predicts that the average inflation rate in G20 countries will rise to around 4% this year, significantly higher than previous forecasts. Georgieva called on countries to exercise restraint in policy responses, avoiding unilateral measures such as export restrictions or price controls, as these could further disrupt global markets. "Don't fan the flames," she emphasized. She also warned that if inflation expectations spiral out of control and trigger a vicious cycle of inflation, central banks should take decisive action to raise interest rates, but at the current stage, "watchful waiting" still has value. Limited fiscal space, tightening policy tools The IMF pointed out that unlike previous crises, countries have accumulated a large amount of public debt following the pandemic, significantly narrowing fiscal space and making it difficult to implement large-scale stimulus measures. While some countries have mitigated the impact of rising energy costs on residents through subsidies or price controls, these measures may further exacerbate fiscal burdens if they lack specificity. Furthermore, the IMF forecasts that countries' future demand for international balance of payments financing will reach $200 to $500 billion, higher than the pre-war stock size of about $140 billion, reflecting an increasing global funding pressure. In the upcoming report, the IMF will present three scenarios: rapid de-escalation of conflict leading to normalization, a neutral scenario, and a pessimistic scenario where energy prices remain high in the long term. Although specific data has not been disclosed, the overall tone has clearly shifted towards caution.